Forget Google redux

Corporate finance expert Tom Taulli says it's time to put under the magnifying glass the conventional wisdom that Google mania will spark a technology IPO frenzy.

May 26, 2004 10:49 a.m. PT

After several years of initial public offerings being considered the proverbial "two-headed stepchild" of the technology industry, the IPO buzz is back.
I recently had lunch with a savvy angel investor and former tech executive who was positively giddy about the prospects for one of his pending deals. "The company is cash flow-positive and has a compelling technology that has very wide application," he said. "I've always been skeptical about taking a company public, but this one seems to make sense."

But are things really different this time?

Undoubtedly, the regulatory environment is much changed. With the slowdown of widespread IPOs and Sarbanes-Oxley legislation, there are costly new hurdles for prospective IPO candidates.

Take a look at how all this thwarted online bookseller Alibris' IPO efforts. As part of its preparations for going public, Alibris had to shell out about $1.5 million because of the advising accountants and lawyers. In this instance, the accountants charged $250,000, and the lawyers received $750,000. Had Alibris gone public, it also would have needed to pay a hefty sum for directors' and officers' insurance. Then there are the ongoing expenses of a public company: quarterly and annual reports, analysts meetings, possible shareholder lawsuits and so on.

We have already seen a good number of tech filings in 2004, but should we expect a flood of tech IPOs throughout the remainder of this year? My sense is that Wall Street and its tech clients may be looking in the rear-view mirror for guidance. There is another important--yet often overlooked--consideration for a technology company: the cost of being a one-product operation.

The lessons of Brightmail
Antispam software maker Brightmail filed to go public in March. The company was seemingly in a great spot. Spam accounted for an estimated $10 billion in corporate costs in 2003, and the numbers are expected to climb even higher in 2004. But with venture capital funding still tight, Brightmail could not build out distribution or its brand. The company may have offered a great antispam solution, but enterprise customers increasingly want full-blown integrated solutions that mesh with their overall security infrastructure.

That was the prelude to a strategic alliance with Symantec, which bought 11 percent of Brightmail in return for a board seat. Brightmail subsequently struck a distribution deal with Microsoft, which now accounts for about 18 percent of total revenue. But while these partnerships have been crucial, they are also tenuous--a fact demonstrated by Microsoft's announced intention of developing its own antispam software.

Simply put, the ecosystem of technology has forever changed.

But companies are willing to take the risk. The Brightmail model of relying on technology add-ons and distribution is quite common--especially in the current funding environment. And given how customers generally prefer integrated solutions, it was little surprise when Brightmail decided to sell out to Symantec for a whopping $370 million in cash (Brightmail had $26 million in sales last year).

Simply put, the ecosystem of technology has forever changed. To be sure, you will find some small companies that disrupt and displace mega tech companies. Such was certainly the case years ago, when minicomputer makers like (Hewlett-Packard's) Digital Equipment and (Getronics') Wang Global arrived on the scene. But the current mega tech companies that dominate the landscape--including Microsoft, Oracle and even Symantec--understand how to deal with upstarts. They also have huge cash hoards, significant market capitalizations and chokeholds on distribution.

Undoubtedly, the executives and underwriters for Brightmail understood the implications of this new environment. The exit point for cutting-edge companies is not to go public but to sell out.